Islamic Banking at the Crossroads: Theory versus Practice

Abstract

This chapter examines the underlying reasons behind the widening gap between the conventional theory and current practice of Islamic banks, arguing that ‘No risk, no gain’ is not a sufficient general principle for organising Islamic finance. It is also not always valid to claim that Islam is averse to granting a time value for money. The overuse of deferred payment contracts in Islamic finance threatens to violate the juristic principle of sadd al-dharaī that is controlling the potential avenues for the circumvention of the law. The chapter suggests some structural changes to the Islamic financial arrangements to create a balance in the usage of profit and loss sharing contracts and deferred payment contracts in Islamic banking.

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